Asia-Gulf trade is rebuilding the Silk Road

Asia-Gulf trade is rebuilding the Silk Road

Trade relations between East Asia and the Gulf are improving as the Silk Road is rebuilt, and comparative advantages become ready to be reaped. Yet, political and cultural differences make the two strange bedfellows.

For centuries the Gulf and Asia maintained a vibrant trade relationship via the Silk Road. Now some are wondering if this ancient route is being rebuilt. Trade between the two regions has increased massively over the last decade. Total GCC trade with China and India rose 16 times and 29 times from 2001 to 2012, while the EU’s share has shrunk for some time. It is likely that China will surpass it as the GCC’s largest trading partner in 2013.

At the moment Asia-Gulf trade relations revolve mostly around oil. Japan receives 80% of its oil imports from the GCC, South Korea 70%, India receives 45%, and China imports over 35% of its oil from the Gulf. Estimates suggest that by 2030, Asia will rely on imports for 90% of its oil consumption. Even taking into account the possibility of a growth slowdown in Asian emerging markets, they represent a solid and growing market over the next several decades.

The Gulf is reorienting its oil and natural gas exports to meet growing Asian demand. This shift is reinforced by developments in Western markets. Exploitation of shale oil reserves is moving the US towards greater energy self-sufficiency, and as new sources are exploited in Canada and Brazil the US will rely less and less on imports from the Middle East. The EIA predicts that the US will only import 30% of its oil needs this year, down from 60% in 2005. This trend is reinforced by reductions in Western demand after the economic downturn.

However, the growth and diversification of trade relations and investment between the Gulf and Asia that would usually emerge from this relationship have not. There are several impediments.

First of all, given the strategic nature of oil, there are limited opportunities to build joint venture refineries or engage in other partnerships that involve ceding control over the resource.

Second, despite many East Asian countries moving up the value chain, the advanced technologies both parties are seeking remain largely held in the West, limiting bilateral cooperation. And firms from the US and Europe still dominate in project-management skills, which are in high demand in both Asia and the Gulf.

Both regions are also in the somewhat unusual position of not needing to attract foreign capital. While this applies less to South Asia, both East Asia and the Gulf have large current account surpluses, the lack of which has proved key to building trade relationships. And in terms of international financial centres, investors from both regions turn to cities like New York and London if they do choose to raise money on capital markets.

Finally, there is far less familiarity or understanding between the two regions as between each of them and the West. There are significant language barriers, as few companies have employees with the appropriate language skills. Student exchanges are limited. There is not much cultural interaction, and they have radically different political structures and ideologies.

However, there are some indications that the basic trade relationship is evolving. South Korea in recent years has won a large share of engineering, procurement, and construction contracts in the Gulf, and China is increasingly becoming a prominent player in that area as well. Even more significantly, in doing so they are beating out Western companies that have been dominant in the region for decades.

As Asian countries move up the value chain to electrical and machinery products, there is an economic opportunity to be realized by stronger trade relations. Given Asia’s labour abundance and the Gulf’s energy abundance, there definitely seems to be a comparative advantage to trading energy-intensive goods from the Gulf for labour-intensive goods from Asia.

This relationship could be formalized soon. Talks between China and the GCC on a free trade agreement have been stop-and-go since they began in 2004, but recent announcements stated that a deal could be signed by the end of this year or early next year.

Perhaps most critical to the direction this relationship will take in the future, however, will be the evolution of the strategic and political relationships involved. Currently, Asia-Gulf strategic international relations appear confused – or at least, do not follow typical partnerships.

While China courts the Gulf for more secure access to its oil, it is acting as a spoiler in the UNSC on Iran and Syria, two issues the GCC has pushed for greater action on. Saudi Arabia has built stronger ties with India, but still considers Pakistan one of its most important strategic partners. India has long been reluctant to comply with sanctions against Iran, the GCC’s biggest strategic threat. It seems at the moment that the major players of the region have decided to put geo-strategic alliances on the back-burner in favour of fostering economic cooperation. However, this arrangement leaves open the possibility that these considerations act as spoilers in the future.

It may be in the GCC’s interest to foster stronger strategic relations with emerging Asian superpowers. As the US pivots towards Asia, there looms the possibility of it abandoning its strategic alliances in the region. The Gulf states will likely want to find someone to fill this void. China could in fact prove to be a better bedfellow than the US, as they are rather less likely to make unwelcome calls for political reform. And the Gulf could prove a useful region, should China choose to pursue a greater international military presence.

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